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Wills and trusts are both tools for estate planning, but work differently. Although most people may have heard of them in a general way, not everybody understands the difference between the two. Either one can help you pass assets on to your beneficiaries after death. You might use either one or both for your estate plan. Here's a brief overview of each, plus some of their similarities and differences.
What Is a Will
A will is a legal document that explains who should receive your assets after your death. It also serves other functions, like:
- Specifying who should carry out the will's instructions
- Who should care for minor children
If you die without one in place, legally referred as "intestate", these decisions will be carried out by a court and may or may not reflect your intentions.
How would assets be distributed without a Will?
When you die, assets are distributed through a legal process known as probate. Your executor, who is someone you entrust to carry out the wishes of your will, follows your will's instructions and oversees the probate process. Your will may be restricted by other documentation. For example, naming a beneficiary to your life insurance policy in your will doesn't override the beneficiary named in the policy itself.
It's important to note that having a will doesn't always protect your beneficiaries from probate, which is the legal process of settling an estate and can take months to years.
What Is a Trust?
A trust is a legal arrangement in which a third party (a trustee), manages assets on behalf of a beneficiary or beneficiaries. The individual who creates the trust is a trustor, grantor or settlor. With some trusts, the trustor may be called a benefactor.
There are a number of different types of trusts and they are commonly used as an estate planning tool for transferring assets to beneficiaries. The type of trust that's right for you will depend on your wishes and financial priorities. For more information on trusts, consider talking to an estate planning attorney.
Will vs. Trust: Some of the Differences
Both wills and trusts help to transfer assets after somebody dies, but the features of a will and a trust are different. Depending on your needs, you may find that one or the other is better for your family or perhaps both are necessary. Here's what to consider.
- Your will defines how assets pass through probate. That legal process involves working with the courts to determine who receives assets, and it can take several months or longer. To go through the probate process, your beneficiaries may need legal help. Probate places demands on your executor or personal representative.
- Assets in a trust do not go through probate. Instead, the trust document specifies what happens to the assets. Establishing a trust requires help from an attorney and costs money, but it allows you to handle some logistics before you die.
- Wills become publicly available after you die. If your estate goes through probate, others may see intimate details such as who you've named in your will.
- Trusts are private. They do not become part of the public record as a result of your death.
- Wills are limited in scope. They primarily allow you to specify who receives assets, who should care for minors and who should handle your affairs. They may cover several other topics, but they typically don't allow you to specify conditions, as a trust might.
- Trusts enable you to provide more detail about when and how assets are distributed. For example, if leaving assets to children, you can prevent them from receiving funds until they reach a certain age or graduate from college.
Can You Use Both a Will & Trust?
Sometimes, it could make sense to combine the features of wills and trusts in your estate plan. For example, you might use a trust for certain assets, such as investment accounts or real estate. There may be assets that don't go into the trust and a will can specify what happens to those remaining assets.
Both wills and trusts help you manage your assets after death, but they have different features. Depending on your circumstances, it may make sense to use one or the other. You could also use these tools in tandem. Consider speaking with an estate planning attorney to learn about the benefits and restrictions of each option. With that information, you can build a plan that suits your needs and goals.